A protester holds a placard outside the Home Office in central London following the government's decision to strip London Metropolitan University of its right to sponsor visas for overseas students. Photograph: Carl Court/AFP/Getty Images

The fiasco at London Metropolitan is making every university with non-EU students sit up and rub its eyes. While British people of all ethnicities may well be becoming more hawkish on immigration, the proposed clampdown on student visas seems designed to appeal to those whose idea of Britain is not imaginative or comprehensive.

Teaching on the master's in creative writing at the University of East Anglia – which last year won a Queen's Anniversary Award for Higher and Further Education – I have encountered students from China, Sweden, India and North America. The Man Booker fellowship at UEA has twice been awarded to Canadians. The next two years will see young writers from Brazil, Singapore, Nigeria and the Philippines arrive in Norwich, newly dubbed a Unesco city of literature. A third of the 2012-13 intake will be non-EU.

The idea that visas might be denied to these applicants, who have competed with around 250 other candidates for 30 places, is as barmy as a bottle of spiders. Many international creative writing students retain British agents and publishers when they go home. Going beyond creative writing, a recent Oxford Economics case-study of Exeter University showed that every 10 international students support six British jobs.

Foreign students add cultural value to their British peers, who need an international outlook. As TS Eliot once put it: "Uniformity means the obliteration of culture, and … self-sufficiency means its death by starvation." The woman of letters knows this too, no doubt.

It's perilous, this cocksure assumption that the UK higher education sector can hold its own financially without foreign students. We're in danger of ensnaring our best export – education – in the deadly red tape that the prime minister so abhors.

Canada recently resolved to double international student numbers. Australia, New Zealand, Germany, France and Japan all distinguish for policy purposes between foreign students and other migrants. Britain needs to follow through and take university-sponsored students out of its net migration target.

Even the Home Office's own analysis indicates that university-sponsored students are no less than 98% visa-compliant, and very likely more. The tiny fraction of fraudulent student visas must be balanced against the huge cost of alienating foreign applications wholesale. And that is happening already. This week, the Times of India reported that Indian students are cancelling applications to UK universities. We just don't seem welcoming any more, despite Olympic bonhomie. This is squarely the fault of a government bent on tearing itself in two. One part stretches our narrow island into the world, adept and flexible and exploratory, seeking trade and influence; the other is chained to the salt-lick of atavistic localism, batting away global opportunities like a cow's tail in June.

We need to tool our development and diplomacy policies to meet the causes of migration at source, in partnership with the countries where they occur. Declining paying students will empty Treasury pockets much more quickly than useful initiatives abroad (in all likelihood the applied product of British university research anyway).

While most academics have come to accept a market economy in education, the very institutions which enable that idea are now under threat. The proposed visa policy could bring universities crashing down, as if they were birds suddenly given wings of lead.

Luckily, there are some wise voices on parliament's business, innovation and skills committee, which published a report on the issue this week. It reveals cross-departmental vellication about the Home Office's plans: "Despite the view of the Home Office, the Department for Business, Innovation and Skills appears to be sympathetic to removing overseas students from the government's migration figures." The report's conclusions come out strongly in favour of recording overseas students in a separate classification and not counting them against the overall limit on net migration. That would be the right decision, recognising the vital importance of the international student to our economy.